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Congress held an inquisition last week.
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the computer company, was in the dock. With the lack of courtesy that's customary on such congressional occasions, Chairman Carl Levin and the members of the Senate Permanent Subcommittee on Investigations announced their conclusions before hearing from the witnesses. And with the clumsy public relations that Congress reserves for the really big stories, the subcommittee handed out its decision for publication the day before the hearing began.

Verdict first, evidence afterward, as the Queen of Hearts might have advised from her throne in Wonderland.

Capitol Hill, however, is an irony-free zone. The members don't know that this sort of posturing is a reason the country's normal people hold Congress in contempt.

Apple is better than most tech companies at designing products that customers really like. Even some members of the subcommittee could not restrain themselves from making obeisance to CEO Tim Cook's products. Then they lashed out at him about Apple's ingenious, creative designs for legal corporate tax avoidance.

"Apple effectively shifts billions of dollars in profits offshore, profits that under one section of the tax code should nonetheless be subject to U.S. taxes but, through a complex process, avoids those taxes," Levin said, applying a bit of creative design to the truth.

The Michigan Democrat did not acknowledge that Apple designed the "complex process" to comply with laws Congress wrote and rules made up by the IRS. Nor did he acknowledge that Apple, like all large U.S. corporations, is subject to continuous tax audit from officials who have never applied Levin's ideas about how much Apple should pay.

Wrong Problem

Although the subcommittee and its investigators defined the problem as Apple's shifting profits from one subsidiary to another to avoid taxes -- which it does seem to do, even though Cook denied it -- the real problem is congressional overreaching. The U.S. attempts to tax corporate income earned overseas. Since the jurisdiction of the IRS ends at the water's edge, the authorities must wait until a corporation brings foreign income home. Then the corporation must pay U.S. tax on that income, minus a credit for whatever it paid to the country in which the money was earned.

One result of this system is that the better a U.S. corporation arranges its affairs to put profits in low-tax countries, the more reluctant it will be to bring those profits home. The subcommittee investigators estimate that U.S. corporations hold $1.9 trillion of untaxed profits in foreign countries. Apple's share of that is about $100 billion.

Debt or Taxes

Apple's potential tax liability on that $100 billion would give anyone pause. CFO Peter Oppenheimer certainly considered carefully how to fund the company's new dividend and share-buyback program. In the best interest of the shareholders, Apple decided to borrow $17 billion in the U.S. rather than repatriate $25 billion, paying the difference to the IRS.

Levin professed outrage about the discovery that Apple has shell companies in Ireland that hold a large share of the company's patents and other intellectual property. The shells charge royalties to other parts of Apple, creating expenses in the U.S. and elsewhere while shifting profit to Ireland, where Apple pays a tax of about 2%. That compares with the top rate in the U.S. of 35%.

Apple also has a subsidiary that's domiciled in Ireland for U.S. tax purposes and operated by Americans for Irish tax purposes. Thus, it achieves tax nirvana, paying no taxes to either country.

Using data that Apple supplied, the subcommittee staff reckons that in 2012 the company shifted $36 billion in worldwide sales income away from the United States and avoided the payment of $9 billion in U.S. taxes that would have been due if the profits had been earned in the U.S. or repatriated.

"Common sense says that Apple would never have offered such a lucrative arrangement in an arm's-length deal with an unrelated party," said Levin, adding that the arrangements result in "massive profit concentration in a tax haven, and therefore massive tax avoidance."

True enough, and we call it a good start on fundamental tax reform in the U.S., worthy of imitation by as many companies as can manage it.

Any company has a duty to shareholders to try to reduce its tax bill. Most of the big ones can manage it. The Government Accountability Office called the roll on the 100 largest U.S. corporations in 2008 and found that 83 had subsidiaries in offshore tax havens such as the Cayman Islands, Bermuda, Luxembourg, Liechtenstein, and Ireland.

Curiously, Apple doesn't play the game to the full extent possible. Most of the profits that it registers in Ireland are earned in foreign countries beyond North and South America. Though Apple could be more aggressive and shift more income to Ireland, it pays lots of U.S. tax. CEO Cook contends that it pays more than any other U.S. corporation -- $6 billion at an effective tax rate of 30.5%.

A Haven Here

The U.S. corporate income tax code isn't merely complex and unjust; it is also potentially self-defeating. If the U.S. government ever succeeds in applying the 35% U.S. tax to foreign operations, it will drive domestic operations abroad. Levin and his allies kept talking about how Apple does 95% of its research and product development in the U.S., but shifts the profits from that investment to the Irish subsidiaries. If Levin drives Apple R&D to Ireland or to any other country hungry for investment, the U.S. will be poorer.

A better strategy would be to make the U.S. a corporate tax haven: Abolish the corporate income tax. Bring the tax-driven foreign subsidiaries home, so that Apple and all corporations can concentrate on inventing new products instead of new tax defenses. Welcome foreign companies to share the benefits of our forbearance. Tax corporate profits through capital-gains and dividend levies.

Creating a tax haven helped to lift Ireland out of poverty; it can work to enrich the U.S. as well.